China Tries To Transform Itself

By John Richardson

CAN China succeed in transforming its economy from one which is over-reliant on exports to one where domestic consumption is a much bigger driver of growth?

And how long will this process take and in the interim, can we expect a few years of lower GDP (gross domestic product) growth?

As delegates gather for this year’s European Petrochemical Association (EPCA) annual meeting in Berlin, these are some of the questions that need to be under discussion.

China’s government is not only trying to break the addiction to investment as a principal way to boost growth. It is also introducing a raft of policies designed to boost energy conservation and efficiency.

How should chemical companies position themselves to take advantage of this new direction for manufacturing industry?

The current Five-Year Plan (FYP) (2011-2015) seeks to set the direction of the economy for at least the next decade, not just the next five years.

Hu Jintao, China’s president, in an early 2011 speech, talked about more “inclusive” growth, which is one of the slogans underpinning the current FYP.

This is supposed to mean a more rational balance between growth and sustainability, production and consumption and hard and soft infrastructure..

One of the key overall objectives is to raise consumption as a percentage of GDP, which at 35 per cent is less than other developing countries. For example, consumption in India accounts for more than 50 per cent of GDP.

This will involve an attempt to redistribute income.

The big state-owned enterprises (SOEs) have become extremely rich due to government subsidies, including cheap land, loans and energy supply.

While they have been getting rich, this has not been to the benefit of the average Chinese citizen: In the ten years from 1997, the share of workers’ wages in national income fell dramatically, from 53% to just 40% of GDP, according to journalist and author Richard McGregor in his book, The Party.

One way of boosting rural incomes would be a more market-based system for setting agricultural product prices.

But if inflationary pressures persist, there could be strong resistance to any changes in how farm prices are set from the National Development and Reform Commission (NDRC).

Breaking the addiction to investment is also going to difficult, according to Chapter 6 of our free online e-book, Boom, Gloom and the New Normal, due to the fact that:

*Up to half of local government financing comes via lands sales to investors in real estate and other types of infrastructure. There are an estimated 45 million local government officials in China. Controlling what they do is a huge task.

*The success of these local officials has traditionally been measured by setting GDP growth targets. The easiest and quickest way to achieve growth is to invest in new real estate, factories, bridges, roads etc

*Big government projects provide tremendous opportunities for corrupt officials to “skim off the top”, as the bigger the project the harder it is to keep control of the final cost.

Another aim of the 12th FYP is to move up the manufacturing value chain in the richer coastal and southern provinces.

Targeted industries include renewable energy as China tries to reduce the amount of energy it consumes to produce each unit of GDP.

The central government has lots of cash to spend on research and development and on acquiring overseas payments. But without an improvement in intellectual property rights enforcement will China be able to attract the foreign investment to fulfil its objectives?

And how will it deal with overseas perceptions over the poor quality of its manufacturing?

The July 2011 bullet train crashes at Wenzhou in China might well have damaged these perceptions, as government officials were widely reported to have buried train wreckage in order to impede an investigation into the cause of the accidents.

Only one-third of China’s 700 million-strong workforce is skilled or highly skilled. Improving education is therefore yet another challenge.

There might also be political difficulties.

Hu Jintao and premier Wen Jaibao are due to give up their main Communist Party posts in late 2012 and their state posts in 2013. Vice president Xi Jinping is expected to replace Hu.

Most of the nine-member standing committee – the party’s decision-making core, which includes Hu and Wen – are likely to step down.

This process could delay decision making as politicians jostle for power, the e-book adds.

Social unrest is a distinct possibility as the economy is retooled – for instance, as coastal low-end manufacturing factories are closed-down and replaced by higher-tech manufacturers.

China’s new leaders might, as a result, want to tread the cautious middle path. This would avoid major social unrest and placate resistance from those who have done well from China’s existing economic model, such as the SOEs.

“Turning the Chinese economy around is a bit like turning an oil tanker around – it is going to take a very-long time,” commented a Singapore-based manager with a global chemicals logistics provider.

The full version of Chapter 6 of the e-book is published in late October. You can download  chapters all the chapters by clicking here.

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